Closed vs Open Mortgage: Which is Best for You?

When you are looking for a new mortgage, one of the decisions you will have to make is whether to go with an open or closed mortgageIn our latest guide, we will discuss the differences between open and closed mortgages, so that you can make an informed decision about which one is right for your needs.

Let’s dive in!

Open vs. Closed Mortgage in Canada: What’s the Difference?

Both types of mortgages have their pros and cons, so how do you know which is best for you? Read along to find out!

What is an open mortgage? 

An open mortgage is a type of mortgage where you can borrow any amount up to the total value of the property, and you can repay it at any time without penalty. This type of mortgage is ideal for people who want the flexibility to borrow more money or pay off their mortgage early if they need to. 

Open mortgages tend to be riskier for lenders because they allow borrowers to pay off their mortgage early without penalty, meaning that the lender could potentially lose out on some of their profits if this happens. 

On the other hand, closed mortgages are seen as less risky because they offer security in knowing exactly how much you will have to pay each month.

Moreover, open mortgages allow borrowers more flexibility than closed ones; they can make extra payments or repayments without penalty and increase their mortgage at any time if required (for example, for home renovations). 

Closed mortgages do not offer this type of flexibility because the lender has already agreed upon a set amount that the borrower must pay each month until they own their home outright. 

open-vs-closed-mortgage

What is a closed mortgage? 

A closed mortgage is a type of mortgage where you can borrow a set amount, and you cannot repay it early without penalty. 

This type of mortgage is ideal for people who want the security of knowing how much they will have to pay each month, and do not want the hassle of having to deal with extra payments.

Closed mortgages are seen as less risky because they offer security in knowing exactly how much you will have to pay each month. In general, closed mortgages with variable rates tend to have lower interest rates than those with fixed rates.

The main difference between an open and closed mortgage is that an open one allows borrowers to have more flexibility than a closed one, while also offering lower interest rates for those who want them. 

Which is right for you? 

There is no one-size-fits-all answer to this question, as the best type of mortgage depends on your individual needs and preferences. However, here are a few things to consider when deciding which type of mortgage is right for you: 

  • How much money do you need to borrow? Should you want to borrow more than $500,000 or so, a closed mortgage may be the best option. 
  • How long do you plan on staying in your home? If you don’t know how long you will live in one place for sure (or if it could be less than five years), an open mortgage is a good choice because it gives you the flexibility to move and sell your home without penalty.
  • What is the interest rate on each type of mortgage? If one type of mortgage has a lower interest rate than another, that can make it more attractive for some people. 
  • Can you afford higher monthly payments? If so, then a closed mortgage may be right for you because it means that the total amount of money you will spend on interest over time is lower. 
  • Do you want more flexibility or security? In this case, then an open mortgage may be better than a closed one. However, if your priority is saving as much money as possible over time by paying off your mortgage faster than required, then a closed mortgage may be preferable.

open-vs-closed-mortgage

What are the pros and cons of each type? 

Finally, let’s take a look at some advantages and downsides of both mortgage types in Canada:

The pros of open mortgages: 

  • The opportunity to pay off your home earlier by making extra payments or repayments without penalty; meaning that you can save money on interest over time if this is something that interests you.
  • Increasing your mortgage at any time if required, without penalty. If you need extra funds (for example, for home renovations) then this can be arranged easily. 

The cons of open mortgages: 

  • Interest rates on open mortgages tend to be higher than those for closed ones because lenders perceive them as being riskier.

Related article: Canadian Mortgage Statistics

The pros of closed mortgages: 

  • Lower interest rates, as lenders perceive closed mortgages as being less risky than open ones. 
  • The security of knowing exactly how much you will have to pay each month can be helpful for budgeting purposes. 

The cons of closed mortgages:  

  • If you want to pay off your mortgage early, you may have to incur a penalty. 
  • You cannot borrow more money than the original amount that was agreed upon. 

Wrapping up

So, what should you choose? As we mentioned earlier, there is no universal answer – it depends on your specific needs. We hope that this article has helped to provide some useful information about getting an open vs closed mortgage in Canada, so you can make an informed decision.

FAQ

Can you lock in a variable rate mortgage?

This is done by asking the lender to “fix” the interest rate for a certain period of time (usually six or twelve months) so that it will not change even if market rates go up or down during that time. 

What is a variable closed mortgage?

A variable closed mortgage is a loan for which there is no penalty if it is paid off early. This can be helpful if you want to pay down your debt faster.

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